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Advanced Real Estate Strategies
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Advanced Real Estate Strategies

Protect your legacy and reduce estate taxes with strategic asset structuring

Max Donovan's avatar
Max Donovan
Dec 23, 2024
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Advanced Real Estate Strategies
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Welcome back, Strategic Entrepreneurs!

Today, we’re diving into some of the most powerful real estate strategies for building and protecting generational wealth. With the current federal estate and gift tax exemption still hovering near historic highs—but scheduled to plummet in just a couple of years—now is the time to implement advanced techniques. From front-loading depreciation with cost segregation to deploying trust structures that shield your estate from looming taxes, these tactics can reshape your financial future.

The tax and regulatory landscape for U.S. entrepreneurs transferring wealth has grown increasingly complex. In 2024, the federal estate and gift tax exemption sits near $13 million per individual (adjusted for inflation). However, starting in 2026, this exemption will revert to about half its current level—an impending “cliff” that highlights the urgency of proactive planning. Real estate, with its myriad depreciation, deferral, and gifting strategies, plays a pivotal role in minimizing both lifetime taxes and the estate’s ultimate taxable footprint.


1. Exploiting Real Estate Depreciation for Income Shielding

Standard Depreciation Schedules

  • Residential property (27.5 years)

  • Commercial property (39 years)

Example Calculation

  • Purchase price: $2 million multifamily property

    • Building (improvements): $1.6 million

    • Land: $400,000 (non-depreciable)

  • Annual depreciation = $1.6 million ÷ 27.5 = $58,182 (approx.)

If net rental profit is $50,000 in a given year, that $58,000 depreciation may zero out taxable income entirely. Over 10 years, you could effectively offset $500,000 of rental profit (assuming similar rent and costs), resulting in substantial cumulative tax savings.

Advanced Consideration

  • Depreciation Recapture: Upon sale, gains attributed to prior depreciation are taxed at up to 25% (federal) for the recaptured portion. Estate planners often combine these properties with 1031 exchanges (discussed below) or hold them until death, ensuring a step-up in basis that erases recapture at the taxpayer’s passing.


2. Cost Segregation and Bonus Depreciation to Front-Load Deductions

Cost Segregation Basics

A cost segregation study dissects a building’s components (e.g., fixtures, electrical systems, landscaping) and reclassifies them into shorter-lived schedules—often 5, 7, or 15 years—rather than the standard 27.5 or 39.

Bonus Depreciation

While 100% bonus depreciation peaked in prior years, it is still available at reduced rates in 2024 (phasing down in future years). Even at 80% or 60%, it can significantly accelerate deductions.

Detailed Example

  • Purchase price: $3 million office building

    • Land: $500,000

    • Building/improvements: $2.5 million

  • Cost segregation identifies $900,000 in 5- and 7-year property.

If the bonus depreciation rate is 60%:

  • Immediate first-year write-off = $900,000 × 60% = $540,000

  • The remaining $360,000 (40%) is spread over the respective shorter tax lives (5–7 years).

An entrepreneur who sells an S-corporation interest for a $500,000 gain could offset it with $540,000 of first-year deductions, neutralizing the capital gain for that tax year. This frees up capital for reinvestment (e.g., additional property acquisitions, and operating capital for new ventures).

Advanced Consideration

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